In the red: Fino CEO Manish Khera. The ICICI Group-backed firm’s losses have soared from Rs6.3 cr for 2006-07 to Rs34.55 cr in 2008-09.

The capital will be used to upgrade Fino’s technology and to expand its reach.

Khera said some of the existing shareholders may exit and the company could be joined by new investors after the equity sale.

Fino’s losses have mounted from Rs6.3 crore for the fiscal ended March 2007 to Rs17.27 crore in fiscal 2008 to Rs34.55 crore in fiscal 2009.

ICICI Group is currently the largest shareholder in the company, with a 30% stake (19% held by ICICI Bank Ltd, 10% by ICICI Lombard General Insurance Co. Ltd and 1% by IFMR Trust). Public sector financial institutions Life Insurance Corp. of India, Indian Bank, Corporation Bank and Union Bank of India hold 7.5% each. The rest is held by the International Finance Corp. (15%) and venture capital firms Legatum Group (15%) and Intel Capital (10%).

Fino was founded in 2006 to build technology for financial institutions that would enable them to serve the unbanked population, but a lack of enthusiasm from banks, claimed Khera, has forced the company to operate as a banking channel, offering products to people, who otherwise don’t have access to formal lines of credit.

As a result, Fino’s 7,000 employees now help consumers open savings accounts and access small loans and insurance, especially in remote areas where banks are absent. Khera also claims that Fino’s model is much cheaper than microfinance because banks save on infrastructure needs.

Khera admitted that some shareholders are sceptical of his expansion efforts, but is confident of raising the funds, citing a good response from banks and non-banking institutions such as venture capital and private equity funds.

“We have also got reaction from our own shareholders that we are a loss-making company, but we told them that you should also consult the business side of your bank. There is a road map, which they are also following, so we will become profitable. We have had a mixed reaction so far,” he said.

Khera said Fino had also discouraged some of its existing investors from putting in more money.

“People who are our original shareholders, but are reluctant to give us business sometimes, we have also not pursued them aggressively for them to put in money,” he said, declining to name them because the fund-raising hasn’t yet been completed.

He is convinced that Fino’s business model will work in the long term. Banks currently give Fino 1.75% of the loan amount disbursed, while its operating cost per transaction is around 3%. Khera acknowledged that the present state of affairs means “profits are still sometime away”.

“This is a micro-business and unless you scale up, you won’t make money,” he said, adding that Fino was hoping to break even by the end of fiscal 2010. “It is not looking good for now because volumes are not picking up.”

Khera said banks can tap Fino’s experience and knowledge of rural customers to directly lend to borrowers in the villages at a much cheaper rates and still make profits. “Even if they (banks) give us a part of their savings, we will be okay,” he said.

However, an executive with a domestic research and credit rating agency said that the case was not that banks were not keen on Fino, but that they likely preferred to do business out of their own branches.

“Banks are very keen on their own network because they are comfortable with controlling and tracking the database on their own, and, nowadays, with bank branches linked because of technology, it makes it easier,” said this executive, who didn’t want to be identified. “But they have to also take into account the cost of setting up a branch. It will be a mix of branches as well as business correspondents.”

An official with a large public sector bank that has been working with Fino for two years confirmed this, saying that while there have been no issues with the company, the bank preferred to do know-your-customer verification itself rather than through Fino. He declined to be identified.

Besides banks, Fino is also involved in government-funded schemes such as the National Rural Employment Guarantee Act and the Rashtriya Swasthya Bima Yojana, as well as the unique identification project, which is headed by the former CEO of Infosys Technologies, Nandan Nilekani.